India’s Rich Halt Power Plans in Setback to Prosperity: Energy

A laborer unloads coal at a wholesale market in India. Photographer: Dhiraj Singh/Bloomberg

Jan. 18 (Bloomberg) -- Soaring coal prices across Asia have
led India’s richest families to shelve plans for a record $36
billion investment in new power stations needed to fuel growth
in the world’s second-fastest-growing major economy.

Billionaire Anil Ambani’s Reliance Power Ltd., Gautam
Adani’s Adani Power Ltd. and Sajjan Jindal’s JSW Energy Ltd. are
among companies that mothballed plans to build 42 gigawatts of
capacity, Association of Power Producers’ data show, equal to 68
percent of the government’s target for the five-year period that
ends in March. While the government sets retail power prices,
coal from Australia and Indonesia jumped 27 percent in the last
two years, eroding profit margins at plants burning the fuel.

“Things may get worse from here before they get better,”
said Sadanand Shetty, who helps manage $1.3 billion of equities
at Taurus Asset Management Co. in Mumbai, including shares in
Tata Power Ltd., the biggest non-government electricity
producer, and Reliance Power. “Fuel supply is the biggest
problem for Indian power generators.”

The billionaires today joined Tata Power Chairman Ratan
Tata in meetings with Coal Minister Sriprakash Jaiswal and Prime
Minister Manmohan Singh on bottlenecks and price curbs that
threaten Singh’s goal to boost growth to rival China. The $1.7
trillion Indian economy grew the least in more than two years in
the July-September quarter as power and factory output slowed.

Jaiswal afterward gave them hope that the situation will
improve. Coal India Ltd., the world’s biggest producer of the
fuel, will consider giving utilities extra supplies, he said.

Economic Lever

“It’s not possible to increase coal output overnight, but
we are doing our best,” Jaiswal told reporters in New Delhi
today. “The power sector’s growth is connected to the nation’s
economic growth and we are serious about addressing their
genuine problems.”

The prime minister assured the electricity industry he
would consider all its issues “in a credible and commercially
sustainable way,” Ashok Khurana, director general of the
Association of Power Producers, told reporters in New Delhi.

“We discussed with him shortage of domestic fuel, cost
increase due to imports, financial health of state utilities and
environmental clearances,” Khurana said. “The prime minister has
decided to set up a committee of secretaries” to probe the
problems.

Daljeet Singh, a spokesman for Anil Ambani and Reliance
Power, declined to comment. Debasis Ray, spokesman for Tata Sons
Ltd., the parent of Tata Power, declined to comment, while Ratan
Tata was unavailable, according to an assistant who received the
call at his office in Mumbai.

Gautam Adani wasn’t available to comment, according to an
assistant who answered the phone at his Ahmedabad office. Sajjan
Jindal didn’t answer two calls to his mobile phone.

Low Bids

Reliance Power and Tata Power are among utilities that won
rights to build plants by bidding prices at which they would
sell electricity. The government sets limits to how much the
price can increase from the levels set for these plants, which
means companies struggle to break even when fuel costs rise.

“The unprecedented number of power projects stuck at the
construction stage doesn’t augur well for the industry,” said
Subhranshu Patnaik, a senior director at Deloitte Touche
Tohmatsu India Pvt. “Unless fundamental fuel issues are sorted
out, shortfalls in power supply will emerge as the greatest
threat to India’s economic growth.”

The utilities that have put 42 gigawatts of capacity on
hold had bid to sell electricity at an average of 2.5 rupees (5
cents) a kilowatt-hour, according to Rohit Singh, analyst at
IDBI Capital Market Services in Mumbai. He estimates that at
current fuel prices the cost of producing power at the proposed
stations would be about 3 rupees a kilowatt-hour.

Expensive Power?

“India must choose between expensive power or no new
power,” Singh said by telephone yesterday. “The situation is
taking its toll on the country as a whole.”

The government has set a target for power companies to
invest $400 billion by 2017 in building power plants and
transmission lines in Asia’s third-largest economy. That’s
double the goal for the previous five years, IDBI’s Singh said.

Building a new coal-fired power station costs about 45
million rupees a megawatt, Singh said. The 42-gigawatt capacity
on hold could cost about 1.8 trillion rupees to build, he said.

India’s economy expanded 6.9 percent in the three months
ended Sept. 30, the slowest pace in nine quarters, compared with
China’s 9.1 percent rate in the same period. Power generation
growth declined for five of the eight months to Nov. 30 as coal
supplies dropped. The government wants to accelerate economic
growth to an average of 9 percent in the next five years.

Living Without Electricity

“Unless issues plaguing the power sector are urgently
addressed, the aspiration for 9 percent growth” may not be met,
the Confederation of Indian Industry said in a statement
yesterday.

The United Nations estimates that more than 25 percent of
India’s 1.2 billion people live without electricity. China,
which has the fastest growth rate among major economies, adds
more generation capacity in a year than India does in five.

Chinese power producers increased capacity by 90 gigawatts
last year and will add another 70 gigawatts this year, according
to the National Energy Administration. India slashed its target
for the five years ending March 31 by 21 percent to about 62
gigawatts, according to the Central Electricity Authority,
because of fuel and equipment shortages.

The government aims to add 100 gigawatts by March 2017,
more than half of which will be coal fired, according to India’s
power ministry. The country’s Planning Commission forecasts
annual coal output will rise 28 percent to 715 million tons in
the next five year, lagging behind a 41 percent increase in
demand to 981 million tons in the same period.

‘Nasty Surprises’

Of the 89 thermal power stations in India, 43 had a coal
stock of less than seven days as of Jan. 16 compared with an
average requirement of 22 days, according to data on the Central
Electricity Authority website.

Shortages of local coal have prompted power producers to
rely on imported fuel for new plants. Since 2007, companies
including Tata Power, GVK Group and Reliance Power have
announced $4.4 billion of coal-mine acquisitions in Indonesia
and Australia, Asia’s largest exporters of the fuel, according
to data compiled by Bloomberg.

“Companies that bought coal mines in Indonesia and
Australia have had a few nasty surprises,” said Chokkalingam G,
chief investment officer at Centrum Broking Pvt. in Mumbai.
“There was hope these acquisitions would help solve much of
India’s coal supply problems. It hasn’t worked out that way.”

Coal Prices

Power-station coal at Australia’s Newcastle port rose 27
percent to $111.35 a metric ton in the two years through Dec.
30, according to data compiled by Bloomberg. Indonesia’s
benchmark price for January is $109.29 a ton, up 24 percent from
February 2010.

The landed price of Australian coal in India would need to
be about $85 a ton for a new power station in India to be
viable, said Michael Parker, a Hong Kong-based analyst at
Sanford C. Bernstein & Co.

Reliance Power has stopped work at a 4-gigawatt station at
Krishnapatnam in the southern state of Andhra Pradesh and is
seeking higher tariffs to cover the increase in the cost of
Indonesian coal, Chief Executive Office J.P. Chalasani said.

“The tariff challenges are industrywide,” Chalasani said
in a Dec. 28 interview. “We’re in dialogue with the government
and electricity buyers.”